Monday, February 12, 2007
In Defense of TIFs Contniued
With respect to manufacturing ventures which create higher paying jobs, the out put of the new plants may be measured by the quantity "Value Added by Manufactures."
A large amount of this increase comes from the sale of goods outside the area, indeed outside the state and the nation. This amount multiplies in the local economy. It is not otherwise obtainable.
Manufacturing entities have the ability to locate where it economically serves them. Many factors figure in, including state and local income taxes, property taxes, labor taxes, utility costs and the like.
Similarly, wholesale operations, whose presence in a specific locality is affected by inventory taxes and property taxes. Wholesale companies prefer, for instance, to locate outside of Cook County (Property taxes $5.00 per sq.ft.) and go to the bordering Counties, to Wisconsin and to Indiana.
Retail commercial properties are another breed of cat. They prefer to locate in areas where the economic levels are relatively high. Retail businesses generate sales taxes; big boxes generate sales taxes for puchases made by peopel from, say, within a fifteen mile range. Sales taxes are the honey pot. Some big boxes can generate $450 per sq.ft. per year in taxable sales. Municipalities have the ability to collect at a minimum a 1% sales tax. Home rule communities have an additional Home Rule Sales tax of up to 1%. With a big shopping center, (400,000 sq.ft.) the numbers are significant. For the longest time Schaumburg's sales taxes from the huge complex along 294 made it unnecessary for the Village to levy a property tax; Oak Brook, as well. On the other side of the coin, Propsect Heights had and has no property tax levy. Their budget came from sales and income taxes. When Safeway closed its 125,000 sq.ft. grocery store, the City has had to close City Hall on certain days and some overnight police service. Its citizens refuse to pass at referendum any property tax. Suffice it to say, that trhe municipalities view sales taxes as a primary source of revenue: the more sales taxes, the lower the property tax levy.
The key to proper management of a TIF for the above purposes, is the cooperation between municipality and the schools. The latter rely on the property tax plus State and Federal aid. On the local property tax bill, the school take is well north of 65%, the municipal take hovers around 10%
Most TIF are financed out with Bond issues. Leaving aside a discussion of minimization of administrative expenses through the use of a muniicipality's general obligation pledge and thus accepting Project risk, the largest costs to be incurred come from (in declining order) the following:
Project costs -- the direct payments made by the municipality for the eligible costs of improvement;
Capitalized Interest -- moneys invested from Bond proceeds to later compensate bond holders during the periods before the project is completed and property taxes can be collected.
Debt Service Reserve -- moneys invested from Bond proceeds held in case the project is not completed on time and/or to the size originally contemplated and thereby affecting the timing of the project revenue stream.
There are techniques to minimize the second and third costs. Municipalities are best advised to seek them out.
The interesting effect about the use of Bonds is that investors will demand that the expected flow of TIF revenues will cover the debt service payments by a factor of at least 130%. This cushion creates an annual surplus. Because the debt service payments are fixed, a higher flow of real revenues will create a larger surplus.
With no additional project costs to be funded, this annual surplus can br used in two ways: to put into an account and used to retuire bonds on the date the bonds are callable; to be distributed to the overlapping taxing bodies, including the schools, in proprtion to their tax rates.
The former will result in an earlier dissolution of the TIF District and the return of the incremental valuation to the tax rolls. The latter will provide current revenue -- revenue that stands outside of the tax caps -- to the schools and the other taxing bodies, but leave the District intact for a longer period of time.
Given the choice, on evidence, the taxing bodies prefer the additional revenue now.
This was true in Crestwood, where my client retired a 20 year bond issue in 13 years by using surplus incremental revenue. The client was adamant, however, about both early bond retirement and the dissolution of the District.
Interestingly, the effect of a big chunk of property values returning to the rolls was a mixed blessing. In exchange for being able to tax a larger base, State Aid the the schools fell in direct proportion. IF the TIF could have been built without the original subsidy (and But For suggests it was not feasible) the annual step ups in property taxes would have been accomapied by annual decreases in State Aid. A bittersweet result.
That is something not contemplated by the research studies. Also not contemplated was the increae in sales taxes and income taxes accruing to the State government as a result of the TIF -- far exceeding the local incremental and sales tax revenues. Of course the State dis not want to share any of their windfall.
Now I must comment on the Professorial conclusion regarding growth in municipalities without a TIF District as oposed to those with such a District. Regression analyses does great wotk with grouping data from a myriad of sources. (If it is so accurate, why do not such analyses concerning incrases in the General State Aid grants, result in increased school performance?)
The answer is that each city -- each village -- offers a different milieu. Crestwood had no 'downtown' but rather a collection of stores and small stip malls scattered up and down Cicero Avenue south of the Cag Sag Channel. Generally, investors did not believe that this could be a shopping area. After completion of the development within the District and its success, Cicero Avenue became an area for continuing ddevelopment as tenants OUTSIDE the District found benefit in that location.
One final point to show the differnce between this Village and others. Crestwood is famous for its municipal frugality. It operates with a mostly part time (unpensioned) police force, a mostly volunteer fire department, an extremely small staff in public works and the clerk's office.
Its mayor has promised and is following through with his pledge to use his surplus sales taxes to rebate all (or as much as possible) of the property taxes paid by Crestwood residents. These sales taxes are generated within and outside the TIF.
We are seeing now what are called mixed use developments, including housing as part of the mix. Municipalities are well advised not to include residences, but if they are included within the TIF District, to collect the property taxes on these properties and redirect them to the other taxing bodies.
----------------
p.s. There is no doubt that TIFs were oversold. Some with municipal guarantees have worked hardships on all taxpayers as revenue did not meet projections and the munipal taxpayers were burdened. That is no reason to throw the baby out with the bathwater.
Once again, it is up to the citizens to stay awake -- not only with respect to the schools but also with respect to what their elected municipal officials are doing.
People may reach me by clicking on the nom de plume below.
A large amount of this increase comes from the sale of goods outside the area, indeed outside the state and the nation. This amount multiplies in the local economy. It is not otherwise obtainable.
Manufacturing entities have the ability to locate where it economically serves them. Many factors figure in, including state and local income taxes, property taxes, labor taxes, utility costs and the like.
Similarly, wholesale operations, whose presence in a specific locality is affected by inventory taxes and property taxes. Wholesale companies prefer, for instance, to locate outside of Cook County (Property taxes $5.00 per sq.ft.) and go to the bordering Counties, to Wisconsin and to Indiana.
Retail commercial properties are another breed of cat. They prefer to locate in areas where the economic levels are relatively high. Retail businesses generate sales taxes; big boxes generate sales taxes for puchases made by peopel from, say, within a fifteen mile range. Sales taxes are the honey pot. Some big boxes can generate $450 per sq.ft. per year in taxable sales. Municipalities have the ability to collect at a minimum a 1% sales tax. Home rule communities have an additional Home Rule Sales tax of up to 1%. With a big shopping center, (400,000 sq.ft.) the numbers are significant. For the longest time Schaumburg's sales taxes from the huge complex along 294 made it unnecessary for the Village to levy a property tax; Oak Brook, as well. On the other side of the coin, Propsect Heights had and has no property tax levy. Their budget came from sales and income taxes. When Safeway closed its 125,000 sq.ft. grocery store, the City has had to close City Hall on certain days and some overnight police service. Its citizens refuse to pass at referendum any property tax. Suffice it to say, that trhe municipalities view sales taxes as a primary source of revenue: the more sales taxes, the lower the property tax levy.
The key to proper management of a TIF for the above purposes, is the cooperation between municipality and the schools. The latter rely on the property tax plus State and Federal aid. On the local property tax bill, the school take is well north of 65%, the municipal take hovers around 10%
Most TIF are financed out with Bond issues. Leaving aside a discussion of minimization of administrative expenses through the use of a muniicipality's general obligation pledge and thus accepting Project risk, the largest costs to be incurred come from (in declining order) the following:
Project costs -- the direct payments made by the municipality for the eligible costs of improvement;
Capitalized Interest -- moneys invested from Bond proceeds to later compensate bond holders during the periods before the project is completed and property taxes can be collected.
Debt Service Reserve -- moneys invested from Bond proceeds held in case the project is not completed on time and/or to the size originally contemplated and thereby affecting the timing of the project revenue stream.
There are techniques to minimize the second and third costs. Municipalities are best advised to seek them out.
The interesting effect about the use of Bonds is that investors will demand that the expected flow of TIF revenues will cover the debt service payments by a factor of at least 130%. This cushion creates an annual surplus. Because the debt service payments are fixed, a higher flow of real revenues will create a larger surplus.
With no additional project costs to be funded, this annual surplus can br used in two ways: to put into an account and used to retuire bonds on the date the bonds are callable; to be distributed to the overlapping taxing bodies, including the schools, in proprtion to their tax rates.
The former will result in an earlier dissolution of the TIF District and the return of the incremental valuation to the tax rolls. The latter will provide current revenue -- revenue that stands outside of the tax caps -- to the schools and the other taxing bodies, but leave the District intact for a longer period of time.
Given the choice, on evidence, the taxing bodies prefer the additional revenue now.
This was true in Crestwood, where my client retired a 20 year bond issue in 13 years by using surplus incremental revenue. The client was adamant, however, about both early bond retirement and the dissolution of the District.
Interestingly, the effect of a big chunk of property values returning to the rolls was a mixed blessing. In exchange for being able to tax a larger base, State Aid the the schools fell in direct proportion. IF the TIF could have been built without the original subsidy (and But For suggests it was not feasible) the annual step ups in property taxes would have been accomapied by annual decreases in State Aid. A bittersweet result.
That is something not contemplated by the research studies. Also not contemplated was the increae in sales taxes and income taxes accruing to the State government as a result of the TIF -- far exceeding the local incremental and sales tax revenues. Of course the State dis not want to share any of their windfall.
Now I must comment on the Professorial conclusion regarding growth in municipalities without a TIF District as oposed to those with such a District. Regression analyses does great wotk with grouping data from a myriad of sources. (If it is so accurate, why do not such analyses concerning incrases in the General State Aid grants, result in increased school performance?)
The answer is that each city -- each village -- offers a different milieu. Crestwood had no 'downtown' but rather a collection of stores and small stip malls scattered up and down Cicero Avenue south of the Cag Sag Channel. Generally, investors did not believe that this could be a shopping area. After completion of the development within the District and its success, Cicero Avenue became an area for continuing ddevelopment as tenants OUTSIDE the District found benefit in that location.
One final point to show the differnce between this Village and others. Crestwood is famous for its municipal frugality. It operates with a mostly part time (unpensioned) police force, a mostly volunteer fire department, an extremely small staff in public works and the clerk's office.
Its mayor has promised and is following through with his pledge to use his surplus sales taxes to rebate all (or as much as possible) of the property taxes paid by Crestwood residents. These sales taxes are generated within and outside the TIF.
We are seeing now what are called mixed use developments, including housing as part of the mix. Municipalities are well advised not to include residences, but if they are included within the TIF District, to collect the property taxes on these properties and redirect them to the other taxing bodies.
----------------
p.s. There is no doubt that TIFs were oversold. Some with municipal guarantees have worked hardships on all taxpayers as revenue did not meet projections and the munipal taxpayers were burdened. That is no reason to throw the baby out with the bathwater.
Once again, it is up to the citizens to stay awake -- not only with respect to the schools but also with respect to what their elected municipal officials are doing.
People may reach me by clicking on the nom de plume below.
# posted by Cal Skinner : 7:56 AM
